Small price changes make a big difference

"Price is what you pay. Value is what you get." ~ Warren Buffett

I am helping a long-standing business that has done well over the last 20-plus years. This company has truly become part of the fabric of the community, but the owner plans to retire in about five years and knows he will have to sell his business when that time comes.

He also knows that in order to get a price that will generate the retirement income he desires, he will need to improve his profitability. Problem is that he feels he has no options for profit improvement, since the economy is not doing as well as he would like and he has already trimmed his expenses back as much as he is comfortable with.

From my numerous discussions with this entrepreneur, I know he clearly understands the problem, but he is hesitant to raise prices across the board in this environment. A price increase, however, has no cost offset, meaning that any gain in profit will increase the bottom line by the same amount. A 2-percent increase in prices will, therefore, improve his bottom line by more than $100,000 and boost the value of the business.

Raising prices is not always the ideal strategy, but it is the way to get there — so long as it is fair and competitive. The trick is ensuring customers do not perceive the increase as excessive.

In this business’ case, the owner is now charging for some services formerly provided free of charge but really should have been charging for all along. Additionally, by judiciously going through all his product and service offerings, he has identified items he could raise rates on without making much of a difference in the total price.

For example, an item he previously sold for $51 he can now sell for $54, which is about a 6-percent increase. Not all items have that kind of flexibility; with other items he will not be able to raise prices at all. Still, he is looking to average a 2-percent increase overall.

If your business is trying to increase profits, raising prices is something you might consider. However, you have to be careful when doing this so as not to alarm your customers. The key is keeping the increases small and looking for ways to camouflage them.

Now, before I get inundated with mail saying I am encouraging businesses to take advantage of their patrons, let me say that I would never advocate charging an unfair price for any product or service. Price increases must be fair to both the customer and the seller — a business needs to charge a fair price in order to remain competitive and keep its operation going.

If you need to improve your profits, go out and look for ways you can fairly increase prices. Take a look at services your competition is charging for but you are providing complimentary and where your prices are behind the field.

Jerry Osteryoung is a consultant to businesses - he has directly assisted over 3,000 firms. He is the Jim Moran Professor of Entrepreneurship (Emeritus) and Professor of Finance (Emeritus) at Florida State University. He was the founding Executive Director of The Jim Moran Institute and served in that position from 1995 through 2008. His newest book co-authored with Tim O'Brien, "If You Have Employees, You Really Need This Book," is an Amazon.com bestseller. He can be reached by e-mail at jerry.osteryoung@gmail.com.